Surprise!! Inox – PVR Merger

Two big names that changed the entire experience of Theatrical Cinema for Indians have announced a Merger. The only two names that most of us probably know when it comes to theatrical cinema. So naturally, the first and foremost question that comes to our mind would be; How will this merger pass the test of India’s Antitrust watchdog Competition Commission of India (CCI)?

However, it is being argued by a lot of analysts that after all, this merger won’t require the approval of CCI. Well, that might sound surprising but, as per the thresholds set in Section 5 of the Competition Act, approval is required if the enterprise remaining after a merger or the enterprise created as a result of the amalgamation, as the case may be, have, turnover of more than rupees three thousand crores. In the preceding financial year, Inox made revenues that didn’t even cross Rs. 150 crores. Revenues for PVR (NS:) in the preceding financial years were around Rs. 750 Crore. It was smart to structure a deal at such a time. However, the point being missed here is that there is one more condition in the Competition Act, which is based on the value of assets held by the entities and the threshold for that is Rs. 1000 crores. The book value of assets for both of these entities far exceeds the threshold. 

The merger of this extent is precisely why the Competition Act was enacted. So assuming the merger does require CCI’s nod, the following are the important points that CCI will observe before passing the judgment:

1. Total market share of the newly merged entity and the concentration of the same.
2. Whether the other competitors will make any efforts to remain in the competition after the combination takes place, or will they stop all of their efforts.
3. Will the newly merged entity create barriers to entry for the competition?
4. Whether mere the existence of the merged entity will curb other competition.
5. Possibility of large profits accruing to the merged entity.
6. Whether the benefits of the merger outweigh the adverse effects on the relevant market.

If this merger creates a new entity then, Inox shareholders would receive 1 share in the merged entity for every 10 shares that they hold. Similarly, PVR shareholders would receive 1 share in the merged entity for every 3 shares that they hold. As of this writing, Inox Leisure Ltd (NS:) was quoting at Rs 526 and PVR was quoting at Rs. 1900, which would mean that, for Inox shareholders, the cost of 1 share in new the entity would be around Rs. 5260 and for PVR shareholders the cost of 1 share in the new entity would be around Rs. 5700. It could be argued that the deal seems to be beneficial for the Inox shareholders, but we need to consider the following differences between Inox and PVR.

1. The Debt in PVR (0.6x Debt-Equity) is much higher than that in Inox (0.1x Debt-Equity), so in the merged entity, PVR is bringing in more Debt for which Inox shareholders need to be compensated.
2. Net profit margins on an average for Inox were greater than PVR.
3. Promoter holding for Inox (43.63%) is also way higher than that of PVR (17.03%) and hence in the merged entity promoters of Inox will have an upper hand.

Even if the merger gets all required approvals, some structural changes to the deal or price caps on the sale of tickets or both might be required by the Competition Commission of India.